Matrix Composites & Engineering Ltd (MCE.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Matrix Composites & Engineering Limited Fiscal Year '25 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Begley, Chief Executive Officer.

Thank you very much. Welcome, everyone, to Matrix's FY '25 full year results presentation. I'm joined by our CFO, Brendan Cocks today, and we will take you through the presentation that's been posted up on the ASX platform. So for those who would like to follow that presentation, I'm going to turn directly to Page 3, a quick snapshot of our business. We are located in Perth in Western Australia. We have a very large manufacturing facility located in the Australian Marine Complex in Henderson. And our 3 key areas of operation currently are to deliver engineered product solutions to the subsea industry globally and to protect the infrastructure with corrosion-resistant coatings and deliver high-performance materials to the defence and resources sector. So essentially 3 pillars to the business, of which the subsea industry represents currently the largest revenue base. So you can see in that chart, the picture of our facility. We're situated on an 85,000 square meter facility, a few hundred meters back from the water in the Australian Marine Complex. Turning to Page 4, give you a snapshot of our FY '25 results. We recorded revenue of -- sorry, AUD 74.8 million. It was underpinned primarily by the demand for subsea buoyancy and equipment. And that was a record year for our Subsea or SURF revenue. It was down from the previous year in terms of the overall revenue, primarily because of project timing and some drifting revenue and earnings into FY '26 and also a muted market in the drilling sector, which we did expect a bit more revenue from. As a result, we did see a slight decline from previous year's results. We also saw recent SURF awards of AUD 45 million drive momentum into FY '26 with our subsea order book currently sitting at just under AUD 60 million. Advanced Materials, we expect to grow considerably this year and we expect also to see steady OpEx and maintenance revenue from our Corrosion Technologies division as we continue to supply materials and services into the local Australian energy and resource markets. The business operated profitably last year with underlying EBITDA of AUD 5 million and cash on hand of AUD 18.3 million. You can see by the pie chart on the bottom right-hand side of Slide 4, the Subsea Buoyancy and subsea products represented nearly 90% of our revenue for last year, of which SURF, which is a relatively new product line for the business, contributed to most of that result. So that's a snapshot of our FY '25 results. I'm going to pass you over to Brendan Cocks now for a more detailed overview of the financial performance.

Thank you, Aaron, and good morning, everyone. So if you just turn to Page 6, which cover the key financial metrics. I'll just make a couple of points on this page. So as Aaron mentioned, AUD 75.8 million in revenue for the year. We had AUD 35 million in the second half, following a AUD 39 million in the first half. So relatively similar. We actually expected the second half to be a little bit higher with about AUD 3 million worth of contracted revenue that was due for the half, but due to a customer request to delay delivery of some product that we manufactured 6 months ago meant that about AUD 3 million in revenue and AUD 1 million in operating profit got moved into the FY '26 financial year. The result of AUD 74.8 million is 12% off last year, but does reflect a 60% increase on what we delivered in FY '23. This equated to a normalized EBITDA of AUD 5 million for the year. And the result net loss after tax was a AUD 2.2 million loss. Just turn to Page 7, the balance sheet. There's cash on the balance sheet of AUD 18.3 million. Net working capital in use at the end of the year of AUD 17.3 million, which reflects our receivables, inventory and trade payables. I'll note, our receivables still remains quite high and that just reflects that we finished a large project right at the end of the year, but there will still be material receivables relating to that project feeding in between at the end of the year and October, replenishing our cash balance ready to execute on other projects that we have won recently. I'll just made a note in this that there is -- you won't see it on the balance sheet, but we do retain tax losses of AUD 140 million. Tax effective that is AUD 42 million. So they're still fully utilizable to us and we did actually used some of those tax losses last year. So we don't expect to be paying tax anytime soon through this recovery. Also note that we still got the convertible notes on our balance sheet. So that matures in December '25. And I just noted there that we have appointed Findex Debt Advisory, who's been working with us over the last 3 months. So we've been running a process where we'll move into a new banking relationship in the coming months. And a big part of that is providing some debt that helps give clarity on how we'll repay the convertible note in December if we need to and that hasn't been converted. So that process has been encouraging. We've had 2 big 4 Australian banks that have provided us term sheets as well as a number of non-bank lenders. So we've got different options there that we'll look to execute on. Turning to Page 8. It's just a cash flow bridge that reflected our working capital movements through the period, supporting our project execution. And also the main CapEx item was build-up of our tool library predominantly for our SURF projects, which served us well during the year and hope will serve us well in future projects. At this point, I'll pass back to Aaron to take you through some more operating slides.

Okay. Thanks very much, Brendan. If you'd like to turn to Slide 9, there's a picture there of some mooring buoyancy, which is awaiting dispatch to Brazil. This was -- this shop was in our yard last year and this was for a job for Petrobras and was part of a large package of work that we executed. Actually, I think the single largest SURF buoyancy job that we've ever won. So -- but also just gives you a bit of an overview of the diversity of work that we're doing in this application. It's not -- these buoys aren't going on to a riser or onto a drilling product, they're actually supporting mooring lines from an FPSO. So it was a good example of the sort of work packaging that we've been able to expand into. So moving to Slide 10, just a bit of more of a deep dive into our 3 business pillars. In the Subsea market, we include engineered products for subsea production. So it's engineered by engineered products. I mean not just buoyancy, but a range of other products that we started to build out into this market. Product to deepwater drilling, which is the company's traditional product line, but it was -- we were very heavily involved in about a decade ago and still continue to service products to deep sea mining, products for decommissioning, mooring and installation and buoyancy for floating wind opportunities and applications of which we would expect to see the first of those major projects reach FID next year. The 2 emerging parts of our business are Corrosion Technologies and Advanced Materials. Corrosion Technologies is a business unit that distributes high-performance coatings into anti-corrosion applications across resources sector in Australia and New Zealand and PNG. And so our clients there include companies like Exxon and Woodside and others. So that business provides sort of month-to-month revenues, which is something that is very valuable to us. Advanced Materials is very much a growth sector for the business. It includes defence products, products for the mining sector and specialty materials for niche marine applications. Turning to the next slide, which is titled, expanding our Subsea Buoyancy product or our subsea product portfolio beyond buoyancy. We included this slide just to stress that the business is expanding its product portfolio in this space beyond just buoyancy. We have a track record, which in some cases is pretty extensive, in manufacturing products that are made from engineering polymers for applications such as bend control on umbilicals, flexible risers and flow lines, VIV suppression products to reduce damage from vibration on pipelines and rises, very large structures that are used to support subsea infrastructure. And increasingly, we provide support services and training to put up -- to actually install our products. And we did a lot of this during the financial year in FY '25 as we provided offshore support services and training services in the field offshore Brazil and we will continue to do that this year in places like Brazil and next year in Mexico and other parts of the world where we continue to deliver products globally. There's a much broader range of applications here. It really represents a product line build-out and an opportunity to also provide equipment packaging to our clients. So they will have an opportunity to buy not just the buoyancy, but all the other products that we can make. And what it does is expand our addressable market probably by a factor of 2 or more as we can package this broader range of products up with buoyancy sales. So turning to the next slide, titled subsea production SURF. So to distinguish subsea production from drilling, subsea production really refers to a line of products that are sold into the development of subsea fields for oil and gas applications. The revenue chart on the top right-hand side there really demonstrates how we've had year-on-year growth since FY '23 in this market. We really did not participate in this market in any material way until FY '23. So it's a relatively new market for us, but we're now an established player. We had the successful deployment of our products in FY '25, over 1,300 DBMs were successfully deployed across 2 projects in ultra-deepwater offshore Brazil. And that's really linked to our credibility and now the ability to expand our customer base and also expand the range of products that we can supply into this sector. I think for anyone that's participating in the offshore oil and gas industry, the subsea market is probably the most attractive because of its -- of the visibility that we have going out towards really past the end of the decade. Demand for products and services from this sector is very strong, driven by opportunities in South America, infill opportunities in North America, a growing market, which could be very considerable in West Africa, especially in Southwest Africa and places like Namibia and also offshore Mozambique on the other side of the continent and a growing number of opportunities in Southeast Asia. And it's really driven by the fact that the economics of deepwater oil and gas are now quite compelling. This technology has got to the point where now this is a very profitable sector to operate in with breakevens that are far lower than Shelf Drilling and indeed more attractive than what we're seeing in North America shale. So it's a good place to be for the business. And the fact that we've been established in this market only for a short period of time, but really built credibility here means that over the next 5 years we would expect to see significant growth in this sector right around the world with our target customer base. And ordinarily, when we look at this graph, we would really only be looking at the SURF portion of the global forecast CapEx spend. Both SPS and pipelines, the spend in those 2 areas, which are subsets of the global forecast CapEx spend will also drive demand for our products as we keep building that product line out. So in many cases, we will be supplying products into subsea applications that don't have any requirement for buoyancy at all. So moving to the next slide, just a bit of an explainer, I guess, on what's happened in the drilling market. Look, most commentary we've seen around this has really seen that utilizations dropped off a little bit from '24 and '25 for drill ships. It's -- demand has drifted into FY '26. So there is an expected recovery in that market next year. As a result, our customers tend to buy fewer spares. Upgrades have become a calendar year '26 story as opposed to a calendar year '25 story. So we have -- we did produce less riser buoyancy in FY '25 than we expected and that was part of the contribution to a slightly lower result than we would have liked in FY '25. But I would point out that in the underlying result, there's been an increase in SURF and SURF revenue, and that's really what's driving the business forward. Although the more drilling product sales we can get the better because it is a part of the market where we tend to dominate that sector. However, we have seen AUD 7 million of new riser buoyancy orders across that period and a further AUD 5 million awarded in recent months for our LGS technology in South America. A very quick note on the next slide on offshore floating wind. It's still very much a story for later in the decade. However, we are seeing some large commercial projects that are likely to hit FID next year, actually in the first half of the calendar year. There's some big opportunities in Korea, Japan and Taiwan that we're focused on. We are actively bidding equipment into these markets. Nothing to do with risers, obviously, but mainly to do with mooring systems, cables and cable protection. So that's a very interesting opportunity for us because of our geographic position and our proximity to what will likely be the world's first commercial scale floating wind markets in North Asia. We really do have a geographic advantage over our competitors who are based in Europe, given the size, the sheer size of the equipment that's required for this. So big potential opportunity, but if we pick up work in this sector, it's likely to be not in the next financial year, but the following one, but we are actively bidding in this space. A quick overview of Advanced Materials. Our primary push into this market is defence and underwater vehicles, manned and unmanned. So we supply specialized materials, components and structures to unmanned underwater vehicles for defence applications and also remotely operated vehicles for civilian use, including ROVs for oil and gas and also telecommunications applications. So we supply buoyancy for very large trenches that basically trench telecommunications cables into deep ocean crossings, buoyancy for work-class ROVs that are going down and servicing subsea oil and gas equipment, and of course, buoyancy and other products for manned and unmanned defence applications. There's also some other opportunities in energy and also LNG that we supply for these product lines, very much a growth area that's something we're pushing very hard and resourcing appropriately. On the next slide, Advanced Materials for energy applications. Centralizers are the key product in this sector. They're a downhole consumable that we sell into the horizontal completions sector for oil and gas. We sold over -- just under 0.5 million of these centralizers since 2013. We have about 20 to 30 different products and different sizes across 4 distinct ranges that we sell into this sector. We're qualified by Saudi Aramco, which is something we've talked to before. And as that becomes an established product, we expect quite significant demand coming from that part of the world. We are establishing a new tranche of distributors globally. So this is something that's a relatively recent development. Our model is very much to find distributors that can package our equipment with their equipment. And so we'll be expanding into markets, including Indonesia, Malaysia, Vietnam, the Middle East, including Oman and Kuwait and in Europe and Norway. We're also changing our distribution in the U.S.A. and Canada. And so we have a much wider reach than we've ever had for this product line and we would expect to see some significant growth from this over the coming 1 to 2 years. The next slide quickly is just a bit of an overview of what we're doing in the mining space. We believe there's a lot of opportunity here for Matrix to supply, in particular, wear products and lightweight structural products into the local mining sector. We're currently working with Rio Tinto on some materials handling equipment, which is going into the field this month into an iron ore mine in the Pilbara. We're building out a specialist team, business development team to really start pushing this market. And we've had lots of sector engagement across a number of different businesses, including Rio Tinto, Fortescue, Alcoa and a number of other companies. So we see an opportunity to leverage our materials technology into this space to provide solutions primarily in wear applications, screening applications and other lightweighting opportunities. So that could be -- our ambition is to build this into a very significant part of our business. The next slide is really about our location. Those on the call may not be aware that we're in the Australian Marine Complex, smack bang in the middle of the Western Australian Engineering and Defence hub. And we are directly behind the common user facility and Australian Submarine Corporation. We also have waterfront access. And this puts us in a very interesting strategic location with respect to being able to service sustainment of surface and subsurface vessels for AUKUS, not just the Australian Navy, but also supporting U.S. and U.K. operations that will be located out of Sterling and also seek servicing out of Henderson. The recent announcement around the surface frigates and also the various large landing barges that will be manufactured in Henderson will present some opportunities to us. We are still exploring the best way of us being involved with those. But in terms of wanting to be located in probably the best geographic location for servicing that sector in Australia, we really are in the best location. And we're currently servicing that sector as well. I mean we have clients such as TELUS, ASC and [ Anduril ] to name a few that we've been servicing for a long time. We're a member of DISP, which is the Defence Industry Support Program. So we are actively involved in that sector. Lastly, Corrosion Technologies. Our -- we continue to build this business unit and expand our customers here. It's very established. We've been doing it now for about 4.5 years and we've been steadily supplying LNG companies like Woodside and Exxon with a wide range of different corrosion solutions from Australia. We're expanding our footprint into the East Coast as well to service both the LNG and mining sector there. So just turning to the last slide, is an overview of our growth outlook. The Subsea business is very much part of our focus to continue to build out both our client base and our product line across that sector because we believe the market conditions are very good for us to significantly build our business into this space and leverage our existing installed capacity to service it. The new product lines that we're introducing will be capital-light and utilize existing facilities and supply chains. So we believe we can enter that market with a very limited amount of capital required. There's lots of near-term opportunities in that sector that we're continuing to address. We'll continue to grow our Advanced Materials business and our corrosion business. And we're seeing some very significant opportunities globally with defence because of our niche market and also in Australia and we'll continue to build our presence in the resources sector to try and utilize the capabilities and skills that we have and our facility and location to service the Western Australian or broader Australian mining sector, which should build a baseload of income for the business. So I think a good and very positive outlook for the coming year and following years. So I'll conclude my presentation there. Thank you for listening. And I think I'll pass back to the moderator to facilitate any questions that might be out there.

[Operator Instructions] Your first question comes from Joseph House with Bell Potter Securities.

I've got 3. Just firstly, on facility utilization. Like it's good to see you've got 2 large SURF contracts which will be worked on starting from the second quarter, but it looks like you're rolling off some large work packages that you recently completed. Is it fair to assume there might be a slowdown or lower utilization maybe in the first half of '26 or the first quarter before it starts to pick up in the second quarter? Just any color around utilization and also how you're expecting to manage your workforce over that half?

Yes. Well, Joseph, you're right, there will be a -- there is lower utilization in the first quarter. And the way we manage that is we do have a large pool of experienced casual labor that we draw from. So being in the Henderson precinct, there are -- there is a pool of casual labor we can draw from work in -- mainly in the mining sector. And as our demand goes up and down from quarter-to-quarter, so we can turn that casual workforce on and off and that's how we manage it.

Great. And does that affect our productivity at all given maybe...

Not really. Sometimes it does. I mean, look, there's always the demand for labor that have things like crane tickets and forklift tickets and that sort of thing. And that could be a little bit expensive to have to retrain people. That's about it. I mean the casual labor that we're employing are really semi-skilled and unskilled labor typically. So we're not having to bring in machine operators or plant operators, that sort of thing. We tend to retain those skills through the cycles. So for example, I mean, at the moment, I think from peak, we're down 50 people, and that's all casual.

Okay. That's really clear. And just secondly, on the SURF contract opportunities you flagged over the next 6 to 12 months. Are you able to provide any maybe clarity on the timing of some of these contracts? Like will it be more second half weighted on the financial year? And just given the delivery dates, should we be expecting that some of these contracts will be kind of overlapping into FY '27 or is there some first half contracts that might be fully delivered into FY '26?

Yes. Look, there are -- it depends on the nature of them. It's a bit of a mixed bag, frankly. There will be some small contracts that will be delivered -- that will be captured and delivered into this year, definitely. Any drilling that we pick up at all, look, we can deliver those very quickly. So in some cases, if we've got the tooling on the ground, we can turn those contracts around in a month. So it really just depends on the nature of it. As we've picked up and become more established in the sector, remember, I'll just sort of point out again that FY '23 was really the first sort of significant year of us delivering products into the SURF market. But as we become established with our customers and we've got a good reputation, so we're starting to get visibility and inquiries for smaller sort of bread and butter orders, if you like. So they may not be contracts that are individually material, but collectively, they are. And typically, there's shorter turnaround. So for example, we manufacture installation buoyancy, which is effectively something we keep on the shelf and sell. We've started receiving inquiries out of the Americas for contracts that go into long-term service arrangements that some of our customers have. So I think there will be more of that. But if we get a really big SURF contract in the -- let's say, at the end of the first half, then yes, the majority of that will be delivered in the following year. So what we're forecasting really is the delivery of the majority of our backlog in this financial year. And then that will be topped up by a number of those smaller contracts and also the sales that we'll see out of Advanced Materials and the Coatings division.

Yes, that's really clear. And just lastly, you spoke a bit about the opportunities that you're seeing in Advanced Materials with Alcoa and in defence. Just keen to get -- are these opportunities near-term or are they more kind of medium-term opportunities that you want to convert?

Yes. Look, there are some that are near-term in mining where we're able to supply products that will be -- that are mainly used in wear applications because the demand is there constantly. So there's a few opportunities there that we're chasing. The product development with Rio is probably a little longer term. However, we'll probably conclude the first phase of our testing in the next 6 months. So that's quite exciting. Then we just need to go through the process of mass producing it. In defence, it tends to have a longer run, but we're actively supplying those companies that we noted in the presentation like ASC and TELUS and Anduril and other UV manufacturers. So -- and in the civilian space for unmanned vehicles, yes, there are a number of opportunities that are near-term. In some cases, Joseph, what we've done is dusted off some of the products that we used to manufacture 10 to 15 years ago that we put into the freezer, if you like. And as we've become -- as we built a bigger presence in the SURF market and also in the defence sector, we've rolled some of those products back out again and reinvigorated them when we started manufacturing them. They're the sort of orders that might be anywhere from AUD 50,000 to AUD 1 million that again build that sort of bread and butter base that the business has lacked over recent times. So it's actually really important that we continue to do that because we're also just tapping into our existing facilities. And so we see that opportunity across defence and resources to do both of those things.

Your next question comes from the line of Nicholas Rawlinson with Morgans.

My first one is sort of a follow-on from Joe's first question. So you guys have mentioned AUD 57 million locked in for Subsea. I'm just wondering how much of that is expected to land in the first half from a P&L perspective?

Maybe. Look, we do. Yes, we're working through those large projects now. So with production starting October, we probably think that it will -- the full year revenue will be weighted towards the second half. But we're still kind of working through exactly what that looks like because we're -- both the client and us are keen to start as soon as we can. And that -- but anyway, second half...

Second half weighted. Okay.

Yes. There is a bit of a pattern to this because it's happened over the last 2 years, it's happening again that we see relatively subdued activity in the first half and absolutely flat out in the second half. I mean we had one period where we're operating at -- I think it might have been in FY '24 in the second half, we're operating at a 70% capacity and we haven't been at that sort of production level for a long, long time, for a period of about 3 or 4 months. And I don't think there's any seasonality to it. It's starting to feel like there is. But that's really how it looks again for this year. And also a reason why those smaller jobs, that sort of bread and butter business is, as I said, is so important to try and fill in some of the lumps and bumps.

Yes. Okay, that's helpful. And just lastly, I think you guys were expecting about AUD 15 million rev from your sort of annuity style segments in FY '25, but it looks as though it's coming at roughly half of that. Could you just explain what happened there and...